2007 Revisited
It’s that time of the year again. As the calendar rolls over, the real estate predictions start rolling in. But before we get to the predictions for 2008, let’s look back at 2007.
My own guesses as well as predictions from most of the frequently-quoted local real estate insiders were covered in this post from last January, save for Steve Tytler, whose predictions are covered here. Let’s see how we all did.
The Contenders:
- Bill Riss, chief executive of Coldwell Banker Bain
- Randy Bannecker, consultant housing specialist for the Seattle-King County Association of Realtors
- Glenn Crellin, director of the Washington Center for Real Estate Research
- Matthew Gardner, local land-use economist
- Steve Tytler, owner, Best Mortgage
- Tim Ellis, editor-in-chief, Seattle Bubble
You can go back to the post to see the full context of all of our predictions. However, for this post, I have condensed everyone’s predictions into a convenient table format for your convenience:
| Riss | Bannecker | Crellin | Gardner | Tytler | Ellis | King Co. SFH | |
| Listings: | - | - | - | - | >0% | >15% | +51% |
| Sales: | 0% | - | <0% | <0% | <0% | <-5 to -10% | -14.5% |
| Prices: | +10% | +6 to 10% | +3 to 5% | +5 to 9% | <=0% | -5% to +3% | -1.14% |
And the person whose predictions most closely matched the 2007 outcome was… Tim Ellis of Seattle Bubble! Steve Tytler gets the honor of being the only other person to be at all accurate, with his generic prediction of a “big increase” in inventory and a general reduction of buyers.
Note that the final reported median price change was almost exactly in the middle of my estimated range of -5% to +3%. And although my inventory and sales forecasts were the closest of the bunch, reality was unbelievably even more extreme than my predictions. So I either got pretty darn lucky, or after one year of following the market in my spare time, I had a better sense of where it was headed than the majority of those whose very livelihood is the market.
2008 Prognosticated
So that brings us to the 2008 forecast. First up, let’s check out what some of the same local real estate insiders are guessing this year:
Year-to-year drops should continue “for a little while,” said Glenn Crellin, director of the Washington Center for Real Estate Research at Washington State University. “I think that the next several months are still going to be challenging, but it’s a little hard to tell,” he said, adding that he also expects interest rates to increase during most of the year, potentially wiping out any savings gained by waiting.
Glenn also made some more specific predictions for the Pierce County market in a Q&A with the Tacoma News Tribune.
For 2008, Gardner is predicting anywhere from zero appreciation to home prices falling as much as 5 percent. “Do I think we’re going to see pain next year? Yes, I do. If there’s some glimmer of hope, it’s the fact we didn’t get terribly overbuilt because of the expense of land,” Gardner says.
I expect home prices to drop about 10 percent to 20 percent over the next year or so, and then the housing market will flatten out with very little appreciation or depreciation for a few years.
Conway anticipates average Puget Sound-region home prices will decline less than 1 percent next year, and sales will be down about 5 percent, before rebounding in 2008. “Given that we had a pretty good run-up in prices, some downward adjustment shouldn’t be surprising,” he says.
It would appear that after being so off base with last year’s optimistic forecasts, most of this year’s predictions are a bit more down to earth. The general concensus seems to be price declines of up to five percent. As with last year, Mr. Tytler is the most bearish of the bunch, and will probably be the most accurate as well.
The Tim’s Predictions
Personally, I’m expecting to see a continued surge in inventory, with year-over-year increases between 10% and 25% throughout much of the year. As prices stagnate and drop, the number of “must-sell” homes will only increase. Furthermore, when public sentiment shifts from “buy now or be priced out forever” to “sell now or be stuck there forever,” listings will continue to increase further.
Sales will probably continue their slide as lending standards continue to tighten (regardless of which direction interest rates go). I would guess that sales will be down at least 5% to 15%. Think of it this way: The record sales that we saw in 2005 and 2006 were basically just the housing market borrowing sales from the future. Well, the future is here, and the debt must be repaid.
I do not expect prices to drop like a rock, but I think that 5% is the minimum drop we’ll see in the median, not the maximum. I’d put the range at -5% to -10%.
So there you have it. Your doom and gloom for 2008. I may be way off base, but at least I’m willing to stick my neck out there and give it a guess. I have yet to see any signs that the market is “bottoming out” or at any kind of turning point. 2007 was the turning point, and we’re pretty plainly headed down into 2008. I don’t expect this mess to work itself out before the year is out.
What say you, the readers?
Jump to the bottom to add your comment. ↓
186 responses so far ↓
1
notabull
// Jan 17, 2008 at 7:41 pm
I think a lot of this is going to come down to whether or not we officially enter a recession. If we do, the sales figures will likely decrease even more than they have done in the last year, which was during the “good times”, economy-wise. Given stickiness in prices, I am guessing that a recession (if we get one) will make the “corrections” 10-15%, rather than the 5-10% that you’re predicting.
It’s pretty pathetic how wrong the “professional” real estate prognosticators were, overall. Any person with a modicum of intelligence and a willingness to research for oneself could see that prices were going to come down. Perhaps they felt the party came to an end too quickly? Personally, I’m not even sure if they realized they were at a party in the first place, let alone one that might end.
2
notabull
// Jan 17, 2008 at 7:44 pm
Question for Tim: Did your price prediction include the possibility of a run up in prices in the Spring, followed by a VERY abrupt 10% decline? Or were you thinking that you’d get a gradual decline throughout the year?
Also, congratulations in being accurate with your predictions!
3
Scotsman
// Jan 17, 2008 at 7:54 pm
I don’t think inventory will rise that much- too many discretionary sellers who will hold off until they think things have improved. Inventory may rise 10%
However, I think sales prices will take a solid hit, perhaps 20%. If you think about it, 20% really only takes prices back to their level a few years ago, and still leaves all but the 2005-2007 buyers with a gain. The national economic picture will have a lot of influence as people’s expectations about the future become more of a consideration. Obviously, the easy days of constant gains are gone, but I’m not sure a consensus has emerged about what the future holds. Caution will rule the day.
And those who stay in, and need to sell….. need to sell! The following graphic posted in the comments section below is a great example of how things can change- one recession/turn-down is not necessarily the same as the last.
link
4
Pegasus
// Jan 17, 2008 at 8:23 pm
Get a clue!
“I think a lot of this is going to come down to whether or not we officially enter a recession.”
We are in a recession already and we will soon be in a depression. Stop waiting for the media to tell you what already happened. Sales are falling off cliffs, our major financial institutions are under water and they only confess part of their problems AFTER they have raised new capital from the next round of suckers. They have been reduced to taking money from crooks, communists or terrorists to bail themselves out as they sell America down the drain. They are trying to salvage their own hides and capital at your expense.
WAKE UP!!!
Ask your two worthless Senators in D. C. what they are doing and if you are lucky enough to get an answer back it will say “Duh”.
5
notabull
// Jan 17, 2008 at 8:26 pm
“Get a clue!”
Get communication skills that enable you to interact with people in a civil manner without looking like a total ass!
WAKE UP!
6
Sorin
// Jan 17, 2008 at 8:37 pm
2008 will see zero or negative economic growth (i.e. recession that has already started). It will take a little longer for Seattle to get the full force of this, but when it does hit, I think it will just make for further declines in home prices well into 2009.
There are a lot of homes that people are trying to sell for more than double what they bought for 5 or 6 years ago. That’s quite simply insane. Worse is that some of them actually get sold still. The main thing that’s going to draw out the fall in prices are the remaining suckers that are still eager to buy at these inflated prices.
7
AndyMiami
// Jan 17, 2008 at 9:06 pm
Today’s PANIC selling while the Fed chief met with our so called lawmakers was actually a bit unsettling. I am truly concerned that we may spiral into quite a steep economic downturn that may be so deep that we may not even care to postulate about Seattle’s real estate market. The de-leveraging of the US (and the UK, Australia, New Zealand, Spain, and more) will be a long and painful process. This may finally result in the masses actually questioning material life on credit and focus on what really matters..family, friends, the enviroment..
8
just_checking
// Jan 17, 2008 at 9:34 pm
What are you guys talking about ? I just got an email this
morning from a local realtor that
“Our market is stable. Our market is solid.”
“The average price for 2007 had a healthy increase,
and was consistent every month.”
True story :)
9
common1sense
// Jan 17, 2008 at 9:55 pm
-5% to - 10% is not a “bubble”. It is a badly needed correction.
10
Sniglet
// Jan 17, 2008 at 10:02 pm
I tend to agree with Notabull that we we will see fairly steep depreciation in 2008 once the recession kicks in and becomes official. When Boeing and Microsoft have their first earnings disappointments (which is inevitable as the global economy cools) the downward trend will REALLY pick up.
My prediction: a 10% to 15% price drop for the Seattle area in 2008 and another 20% drop in 2009. I will go further to say that we won’t hit bottom until the medians are at least 60% to 70% lower than 2005 prices, sometime in 2010 or 2011.
11
Jillayne Schlicke
// Jan 17, 2008 at 10:25 pm
If lenders continue to feel the pressure by regulators (and now enter stage left: The Politicians) to modify defaulting loans, we will only see defaults and foreclosures continue to rise for a long time. The banks are hiding their problems for a few more years so they can minimize their billion dollar write-offs today.
It is painful to watch all this taking place in slow motion.
12
hesotriflin
// Jan 17, 2008 at 10:49 pm
“common1sense said,
on January 17th, 2008 at 9:55 pm
-5% to - 10% is not a “bubble”. It is a badly needed correction.”
In terms of nominal value it may seem like a “correction” but when you factor the dollar has been tanking and inflation has been rising for the past year, the ‘real’ value of the loss in home prices is much greater.
13
economist
// Jan 17, 2008 at 10:55 pm
Get communication skills that enable you to interact with people in a civil manner without looking like a total ass!
Look, if you come across a drunk passed out on the railroad tracks with a train coming, you don’t interact with him in a civil manner. You slap him in the face until he wakes up.
That drunk is J6P, and that train is something called reality.
14
Garth
// Jan 17, 2008 at 11:30 pm
I am amazed the median is not down again, jumbo loans in California this december are down 70% from december 06 and the median is way way down.
Even in a great market, with prices where they are the near disappearance of jumbo loans should have had more of an impact.
15
crystalball
// Jan 18, 2008 at 1:06 am
I think Tim’s estimate of -5% to -10% change in prices YOY is probably accurate by the end of 2008.
If a regression of the YOY change in the CSI for Seattle during the last 12 months may represent the deceleration into the future at least for the near term, then this plot shows what the predicted future deflation might be over time:
http://i251.photobucket.com/albums/gg317/bubbleblog/deflation_projection.gif
For comparison, I have also included projected deflation for Boston if it’s current rate of deceleration continues. The deflation that Boston has seen may be more like what we would expect to see in Seattle beyond 2008. Boston has had the longest downhill run of any city on the CSI and it seems to closely track the observed deflation of the 20-city-average CSI.
The chart above probably is a “worst case” over-estimate of the rate of deflation for Seattle beyond 2008 because at some point its deceleration will probably slow down like it did in Boston.
Seattle probably won’t show negative year-over-year until early 2008, but it will probably be in the -5% to -10% YOY by the end of 2008.
I also calculated the actual deflation from the peak Case-Shiller Index for every city in the chart at this link:
http://i251.photobucket.com/albums/gg317/bubbleblog/deflation_all_cities.gif
To create this chart I found the peak CSI for each city and then calculated the percent reduction from the peak for each subsequent month.
16
col
// Jan 18, 2008 at 5:56 am
Prediction: 8 percent correction in 2008, and price drops continue for at least 3 to 4 more years (depending on this depth of the recession).
Downer side note: I calculate just a 10 percent price price drop in King County will cut household wealth by around $17 billion.
17
Pegasus
// Jan 18, 2008 at 6:10 am
notabrain…….
“Get communication skills that enable you to interact with people in a civil manner without looking like a total ass!”
Yes you can shoot the messenger or attack anyone who voices a strong opinion that makes yours look stoopid but have at it while your brains fall out here. Perhaps you were defensive because you are a fan of Sen. Patty “Useless” Murray?
My point still is and has been that this is going to end in a massive depression that may end in a revolution because our financial institutions and government are so corrupted that it is beyond repair. By this year’s end you will figure it out. In the meantime have some more koolaid for the masses being bantered about today by our heroes in D.C. and in New York . Free money for the peasants. Bushels full in the form of tax rebates to bailout the economy. Tomorrow they promise free beer!
18
notabull
// Jan 18, 2008 at 6:45 am
“Yes you can shoot the messenger or attack anyone who voices a strong opinion that makes yours look stoopid but have at it while your brains fall out here.”
You may not realize it, but it’s possible to express strong opinions without being offensive to others and acting like a child. You seem to lump the two things together.
I’m not debating whether we’re going to be in a depression or not, and I actually happen to believe we’re in a recession already. However, that point is still open to debate amongst others so I feel it’s best to not jam my opinions down other people’s throats, as you are doing.
The fact that you’re unable to express your opinions without being a complete jerk shows a lack of communication skills and a bad attitude that will likely hold you back in your life, if it hasn’t done so already.
19
Kime
// Jan 18, 2008 at 6:57 am
“In terms of nominal value it may seem like a “correction” but when you factor the dollar has been tanking and inflation has been rising for the past year, the ‘real’ value of the loss in home prices is much greater.”
You have to keep in mind that the inflation of the last few years was driven by the housing boom. The housing bust will have the opposite effect, to some extent. It’s just that there is a lag of a year or two between the cause and effect. I don’t think we will be seeing the inflation you are expecting.
20
Buceri
// Jan 18, 2008 at 7:03 am
Survey - will anyone here spend the money they get in the “stimulus” coming up?
I think the answer for most Americans will be “no” (most will lower debt). Some of us will throw it in the bank. So what good is it?
21
notabull
// Jan 18, 2008 at 7:13 am
“You have to keep in mind that the inflation of the last few years was driven by the housing boom.”
In what way? While this may be true, it should be noted that in a direct sense “inflation” doesn’t include house prices, but “owners equivalent rent” which actually stagnated during the housing boom.
I’ll readily admit that you may be looking at other factors, like perhaps the extra wealth and equity withdrawal putting extra money into the hands of consumers, chasing fewer goods, etc, etc.
IMO, inflation will moderate but it will take time. I find it hard to see a situation in which we’re in a recession, people have less jobs, but still demand is high for oil, goods, etc. Anyone remember the last recession? At the end of it the worry was *deflation* not inflation. And this was at a time when the interest rates were at rock bottom.
Some suppose that the fed is in a bind, and that it’s in a tough situation because it can’t lower rates for fears of stoking inflation. But if it’s also true that rate cuts take 6 months or more to actually hit the economy, and it’s true that we’re in a recession (likely), then the rate cuts should take effect at about the same time as inflation pressures moderate. I think this is the balance that the fed is trying to achieve, while at the same time trying to stop Wall Street crying like babies because some hedge fund managers are losing money.
22
ray
// Jan 18, 2008 at 7:21 am
predictions.ahhhhhhhh…easy 1 here. Trendline down, excess inventory, increasing short sales and BK activity.
Personally my real estate portfolio will see an increase of 20% adding 5 additional properties.
500 Realty will see an increase of over 2000% from our Grand Opening in Aug 2007. Our Kent and Reno office will be open.
Easy year to predict. Also EGHT will be up over 100%. But, that is my biggest risky call. I’m in over 80k long at .95 pps.
Ray Pepper
Broker
http://www.500Realty.net
23
notabull
// Jan 18, 2008 at 7:27 am
Ray,
What’s your rough estimate for house price changes in King county this year? In your opinion, when is a good time to buy for a consumer that wants to buy one property and can’t “dollar cost average” like yourself?
Also, you neglected to tell us to always be looking for GEMS! Just teasing… :)
24
sf_boomerang
// Jan 18, 2008 at 7:31 am
Buceri,
I’m not holding my breath on the stimulus refund or tax cut or whatever form it will take. Any money that does come my way is going into savings, hopefully to buy a house in a couple years…
And, if people do chuck their rebate check at their debt (with much the same effect of throwing a paper cup at a tidal wave, I’m guessing), of course that will do some good! It’ll help the big banking corporations get some much-needed cash. And in the end, isn’t that the important thing? ;-)
25
MacAttack
// Jan 18, 2008 at 7:37 am
Yes, but Tim, did you factor in that GWB wants to borrow $1600 from China to give to my wife and I, in hopes that we’ll spend it on more consumer crap? Sorry, George, into savings it goes.
26
Kime
// Jan 18, 2008 at 7:37 am
“I’ll readily admit that you may be looking at other factors, like perhaps the extra wealth and equity withdrawal putting extra money into the hands of consumers, chasing fewer goods, etc, etc.”
Yes, I am referring to the increase in the money supply from the housing boom which took a while to reach the prices of goods. The increase in debt from housing, including mortgages, home equity loans, etc, was really incredible, which increased the money supply. This dwarfed the increase in the money supply from the war by a factor of about 10 at the height of the boom. This along with the general feeling that since the home is worth so much we must be rich caused a flurry of spending that was not related to income, plus it did actually increase the income of some people, but not most people.
The collapse of debt will shrink the money supply, and the strange realization that maybe it is better to live within your means and that when you take money out of your home it is actually another way of saying you are going more into debt, and not that you are richer, or even the possibility that lenders might only lend money to people who can actually pay it back are going to have the opposite effect from the opposites of these things that occurred during the boom.
27
notabull
// Jan 18, 2008 at 7:43 am
“The collapse of debt will shrink the money supply, and the strange realization that maybe it is better to live within your means and that when you take money out of your home it is actually another way of saying you are going more into debt, and not that you are richer, or even the possibility that lenders might only lend money to people who can actually pay it back are going to have the opposite effect from the opposites of these things that occurred during the boom.”
Absolutely true. It bugs me so much that the general perception is that this equity is “locked up” in your house not doing anything for you! Free the poor locked up equity!!!
Even using your home equity to pay off credit card debt is an amazing thing. While being a sensible decision, if done correctly, it’s just another way of paying for the past with the future, but using a tax advantaged loan. And we’re all seeing what the effects of that are, as the credit card companies are feeling the squeeze, and are squeezing back at consumers. Who could have know that these people would just keep on spending and max out their cards again?! Shocking!
28
sf_boomerang
// Jan 18, 2008 at 7:50 am
Notabull,
Reminds me of this old commercial:
http://www.youtube.com/watch?v=hn5EP9StlVA
Someone should do a follow-up with ol’ Stanley Johnson… see how well things are working out for him these days: “Now I lost my house, and my wife and kids left me. Somebody help me… with a quarter. Any spare change at all… seriously… I need food…”
29
ray
// Jan 18, 2008 at 7:51 am
notabull I personally don’t find Washington State with the highest returns. All my money and investors money is going South. Of course there will be isolated “Gems” everyday. But, you must find them. Homes will not come down enough in our PNW region in 2008 -2010. Just too many jobs, port, etc. Remember we come in and buy @ 40-60% off of artificial highs that we already discounted.
The Gems here always tend to get bought up quickly. Do your leg work, watch the MLS, target your area, and have an aggressive Agent. Keep an eye on **Puyallup**. Huge excess inventory will make for many a deal in the coming year.
You don’t need luck. Just time and effort. 2008-10 will be an outstanding time to build a portfolio for you. I also love World Savings as a lender. They got bought up by Wachovia but have great products. COSI and CODI. Mtg reps if you are going to attack me over this statement. Remember I’m talking investing for REAL INVESTORS. Not Joe Schmo homebuyer.
http://www.500Realty.net
30
sf_boomerang
// Jan 18, 2008 at 7:58 am
Hey! Who you callin’ a Schmo?
Just cuz some of us make money in other ways. Let’s see you make $1000 a night pole danci…err… I mean… writing code.
:)
31
Ira Sacharoff
// Jan 18, 2008 at 8:09 am
I realize it’s early and my brain is foggier than usual, but I’m seeing that Steve Tytler predicted zero for ‘07, The Tim predicted minus3 to minus 5, and the actual number was minus 1.14, so why does The Tim get to declare himself the winner? Wasn’t Tytler closer? and is the prize a 300,000 house costing 500,000 with a subprime mortgage with adjustable rates?
My prediction for ‘08:
The price of the median SFH in King County will decline by 8-10%.
32
Cynic
// Jan 18, 2008 at 8:18 am
Ira,
The Tim predicted plus 3 to minus 5, not minus 3 to minus 5.
33
The Tim
// Jan 18, 2008 at 8:42 am
Ira,
As Cynic pointed out, my prediction was -5% to +3%, of which -1% is smack in the middle. Also, I made more specific and closer predictions on inventory and sales. As I said in the post though, Steve Tytler was in fact accurate on the direction of his inventory and sales predictions, and essentially just as close as I was on price, which is why he gets the close-second honors.
34
AndySeattle
// Jan 18, 2008 at 8:50 am
My prediction: Price drops between 15% - 25% in outlying areas like Marysville/Lake Stevens, Snoqualmie Ridge, Kent/Maple Valley and drops between 5% - 15% in closer areas like Ballard, Redmond, Sammamish, West Seattle and White Center. Inventories will continue to rise (~20% - 25%), foreclosure percentages will rise but not be as prevalent as earlier expected. This trend will continue into and through 2009.
Buceri said:
Survey - will anyone here spend the money they get in the “stimulus” coming up?
I’m in an interesting position personally… I spent two years in a promising start-up that ended up tanking a few months ago. I knew going in that I would be paid at 50% my market rate salary and times got real tough near the end. I ended up incurring some debt, while manageable, it’s far more than I feel comfortable with. Now back with a more traditional company I’m on target to have it all paid off by late fall 2008. That being said any ‘windfall’ that the ‘great’ GWB sends my way will just get thrown at the pile.
I will continue to rent and save aggressively until 2010, 2011 on the outside, as I don’t think the housing market rebound will be very steep.
35
Ira Sacharoff
// Jan 18, 2008 at 8:52 am
Got it. Congrats to the Tim. I just can’t read early in the AM, takes a while for the eyes to focus.
I will also predict that by the time ‘08 is over, inventory will be down a little bit. How much higher can it go?
36
Chris
// Jan 18, 2008 at 9:15 am
Jillayne -”The banks are hiding their problems for a few more years so they can minimize their billion dollar write-offs today”
this makes no sense to me. why not come totally clean now, as it can be blamed on the market, not individual incompetence, and hit rock bottom (so long as it not a BK scenario) and provide investors with the confidence to know things can only improve? Seems a more logical tactic than drawing out the pain over a longer period and loosing investor confidence in the company
37
NotaBull
// Jan 18, 2008 at 9:23 am
“this makes no sense to me. why not come totally clean now, as it can be blamed on the market, not individual incompetence, and hit rock bottom (so long as it not a BK scenario) and provide investors with the confidence to know things can only improve?”
I’m not an expert in this, but it seems to me that if a bank were to come clean on the (lower) value of its assets, then it would either have to stop lending so much *new* money (so they lose transactional fees) and/or they would have to increase rates on savings accounts and CDs in order to attract new deposits. There is a ratio of assets to liabilities they are allowed to maintain.
Check out bankrate.com and look for the best rate for a 5 year CD. You’ll find all the banks that have been in the news recently. WAMU are offerring a 5.1% 6 month CD! That’s crazy in the current interest rate environment. They need the deposits and they need them BAD. Having to give higher rates to savers will thin their margins at the same time as they are losing transaction costs on loans they make. So it’s a triple whammy:
-Less money from loans.
-Less profit from deposits
-Losses that they *are* willing to admit to
And besides, if they hide some of the losses for a while, maybe the problem will go away? :)
38
monkey
// Jan 18, 2008 at 9:31 am
Does any one know why the prices in Lynnwood, WA still high? Prices range from 550K - 700K?
39
Ken Mott
// Jan 18, 2008 at 9:36 am
I agree with Andy, but i think it will be 10-15% decline in great King County.
So my predictions
Prices -10 to -15%
Inventory +25-35%
Sales -25%
Oh and i look at houses in the Vancouver WA area and it seems like 1 out of 5 is a short sale if approved by the bank. This is in the 250k range houses.
40
sf_boomerang
// Jan 18, 2008 at 9:47 am
Speaking of inventory, looks like we’re solidly above the 9k mark on KC SFH. Just keeps creeping up…
41
crystalball
// Jan 18, 2008 at 9:54 am
Only real estate brokers and mortgage brokers will tell you it is a great time to buy now. In reality there will never be a better time to sell than now if you hold real estate as an investment.
You should only buy now if you are ok with a 30% or more drop in value over the next 5+ years.
Sell now!
42
vboring
// Jan 18, 2008 at 10:02 am
now would also be a good time to buy if you expect hyperinflation and you think your salary will go up with inflation.
40% of your income today would only be 20% of your income after a few years of 10% inflation.
43
vboring
// Jan 18, 2008 at 10:04 am
if we consider the macro impact of a 30% drop in house prices nationwide, hyperinflation starts to sound pretty likely.
if you believe in one, you have to at least consider the possibility of the other.
44
b
// Jan 18, 2008 at 10:10 am
Chris,
The reason is because of what you said, bankruptcy. Many of these banks would be insolvent if they actually priced their assets to market value. So many, in fact, that the government/Fed is colluding with them to prevent just that. Better to dribble out a few billion here and there for the next two years than everyone go tits up now and slam the entire world into the next great depression. That is the current thinking at least, however it looks more and more likely that people are not being fooled anymore.
45
b
// Jan 18, 2008 at 10:13 am
vboring,
A 30% drop in national housing prices is a huge sign of deflation, not inflation. The Fed is dropping rates into the toilet because they know any inflation caused by it is temporary and the hope is that they can front run deflation enough before it contaminates the rest of the economy. If they are unsuccessful we are looking at another depression.
46
AndySeattle
// Jan 18, 2008 at 10:28 am
monkey said:
Does any one know why the prices in Lynnwood, WA still high? Prices range from 550K - 700K?
Same as anywhere… Hype. It’s just one more micro-market with inflated prices. For what it’s worth it seems Lynnwood (yes, Lynnwood) and Mill Creek are the hotspots in Snohomish County right now. ~15 miles from downtown, decent schools and a ‘destination’ shopping mall adds to all the Pink Pony criteria. Yes, Lynnwood is special too apparently.
47
Jillayne Schlicke
// Jan 18, 2008 at 10:29 am
Hi Chris and b,
This is from the MBA report on preforeclosure workouts released today:
“Borrowers who had worked with their lenders and established loan modification or formal repayment plans, and then failed to perform according to those plans, accounted for 29 percent of all foreclosures in the third quarter. The inability of borrowers to meet the terms of their repayment plans or loan modifications accounted for 40 percent of subprime ARM foreclosures, 37 percent of subprime fixed foreclosures, 17 percent of prime ARM foreclosures and 14 percent of prime fixed foreclosures.”
It’s at the top of the CR blog at the moment.
http://calculatedrisk.blogspot.com/
This tells me that if lenders didn’t perform due diligence work at the retail level, then at the workout level, the loan must be completely re-underwritten in order to figure out if the lender is better off cutting their losses now.
Slamming loan modifications through will only drag out the foreclosure statistics for many years.
48
economist
// Jan 18, 2008 at 10:50 am
A 30% drop in national housing prices is a huge sign of deflation, not inflation.
Well I guess a drop in the price of any capital asset is a sign of deflation, then? Like the 50% drop in the stock market in the 1970’s?
Asset prices - stocks, RE - are driven by different mechanisms than consumer prices and they can, and do, move in different directions. That’s essentially because they are correlated with bond prices which fall with inflation. Falling asset prices aren’t going to do anything about the cost of imported oil, or any world priced good such as food, which rises as the USD falls.
49
vboring
// Jan 18, 2008 at 10:52 am
b,
Ben Bernanke talked about how any government could insure inflation over deflation by devaluing or threatening to devalue their currency in 2002.
if the people who have the strongest control over the value of a currency whose value is based only on confidence are convinced they can decrease its value, then i see no way to disagree with them. the Fed can’t do this unilaterally, but the gov’t could.
50
Marc
// Jan 18, 2008 at 10:58 am
Since erveybody’s going on record in one place here’s my two cents.
King County single family median price will decrease 1%-10% and I’ll hang my hat on -5%. Seattle “core” will handle the slow down better, likely decline just under -5%.
Overall closed sales will continue downward trend but low rates keep enough people buying that the decline will be less than 15%. Inventory up but not dramatically, say 15%.
51
patient
// Jan 18, 2008 at 11:06 am
If I understand it correctly the 10y bond yield is simplified a rate that the market predicts will beat the average inflation the next 10 years. It’s currently at 3.6%. Hardly hyperinflation. The market is not always right but the bets on hyperinflation seems to be very few.
52
b
// Jan 18, 2008 at 11:16 am
economist,
The housing bubble deflating is being caused by banks not lending money anymore because they are worried about their loans. Unlike asset prices such as oil or grain, housing prices are directly correlated with lending and are a huge part of the banking system in the world. Prices decreasing 30% nationwide points to a huge amount of lending that is NOT being done anymore, causing a severe contraction in the money supply. I am sure as an economist you understand how our fractional reserve lending system works. The problem right now is deflation because banks do not want to lend each other money and thereby “create” new money. The Fed can put the rates at 0% and it won’t matter if the banks do not want to lend it back out because the risk is too high. This is a fundamental issue of solvency and trust, not liquidity, and that is why deflation is almost a guarantee unless something dramatic happens.
53
b
// Jan 18, 2008 at 11:20 am
vboring,
No, all they can do is hope that they can stop deflation with inflation. The rates that caused this enormous credit bubble are so low already that the Fed has a very small amount of room to work with. The rates could go to 0% or even negative like in Japan and it won’t matter if the primary lenders don’t think the collateral/risk is worth it. There is no way hyperinflation is going to occur in this environment because, again, this is an issue of solvency and trust and not one of liquidity. All signs point to serious contraction in money supply and not the opposite. Just wait until all of the other derivatives created in the last few years (auto loans, credit cards, etc) start defaulting higher than predicted, we are at a serious risk of total credit collapse.
54
NotaBull
// Jan 18, 2008 at 11:21 am
“It’s currently at 3.6%. Hardly hyperinflation. The market is not always right but the bets on hyperinflation seems to be very few.”
I think a lot of people throw the term “hyperinflation” around without really having an understanding of the term. To them, it might mean 5% or 10% inflation. This is *high* or *very high* inflation and not *hyper* inflation.
Check out the picture of the woman loading her furnace with bills! That is hyper inflation to the extreme degree.
http://en.wikipedia.org/wiki/Hyperinflation
The same extremist descriptions are thrown around when people state with 100% certainty that we’re headed towards a DEPRESSION! I’m not even sure what a depression is, at a technical level, and it seems pretty darn unlikely we’re headed back into a 1930s depression era. Deep recession? Yeah, I could see that…
55
NotaBull
// Jan 18, 2008 at 11:30 am
“The problem right now is deflation because banks do not want to lend each other money and thereby “create” new money. The Fed can put the rates at 0% and it won’t matter if the banks do not want to lend it back out because the risk is too high. This is a fundamental issue of solvency and trust, not liquidity, and that is why deflation is almost a guarantee unless something dramatic happens.”
I think this is exactly right.
We can’t say that the only way people can spend in the US is through credit, and at the same time state that people will keep spending even while credit is contracting. We’re already seeing consumers slowing down in spending and credit card companies seeing higher delinquencies. Lower demand will reduce price pressure on commodities, even oil (in the short term). Maybe not “deflation” but certainly a reduction in inflation…
56
vboring
// Jan 18, 2008 at 11:57 am
yeah, i don’t know what the technical definition of hyperinflation is either, so i threw 10% out there as a high, but not unimaginable rate.
to be fair, i was actually referring to a 10% increase in cost of living, not 10% increase in money supply. the two are related, but not identical. both are referred to as inflation.
if we think house prices will continue to decrease, and acknowledge that this will lead to difficult financial and economic circumstances internationally, then can’t we assume that the Fed will respond the one way it knows how to and lower the reserve rate?
if they do this, then either nothing will happen, like in Japan 1990 and we’ll know we’re screwed for the long term or banks will take on more debt, sell it to consumers at new lower rates, more loans will be taken and the money supply will increase. aka inflation. and we’ll bubble our way our of this crisis and into another one a few years down the road.
the increase in money supply will likely result in an increase in cost of living, since there will be more dollars chasing the same set of goods.
so, if you think this is likely to result in high rates of increase in cost of living and if you think your employer will match those cost increases with salary increases for you, then you may be better off buying a house now while interest rates are low, since it is unlikely that nominal house prices would fall while the currency is being aggressively devalued.
57
Buceri
// Jan 18, 2008 at 12:04 pm
I remember Buenos Aires in the 70’s. Prices on clothing in boutiques’ windows were replaced by letters. Then, there was a sheet taped on the window with all the letters and the current price. If you walked by a few hours later, the prices had gone up. People used to get paid and run to fill up with groceries, otherwise they could not make it to the end of the month. Now, THAT was hyperinflation!!
If you still feel the mierda won’t hit the fan, read this:
http://articles.moneycentral.msn.com/Investing/JubaksJournal/TheNextBankingCrisisOnTheWay.aspx
58
Joel
// Jan 18, 2008 at 12:27 pm
I agree with b on deflation and my guess for 2008:
Prices -10%
Inventory +50%
Sales -25%
59
SunTzu
// Jan 18, 2008 at 12:31 pm
“I’m not even sure what a depression is, at a technical level….”
Try 25% unemployment and a 50% dive in stock market indices.
I agree that kind of meltdown seems unlikely today because we’ve learned some stuff from the 30’s.
I can see something like that happening only if some sort of unexpected, extraordinary catastrophic event on top of the current financial problems takes place.
60
John
// Jan 18, 2008 at 12:38 pm
Like a terrorist attack?
61
Kime
// Jan 18, 2008 at 12:40 pm
“I’m not even sure what a depression is, at a technical level, ”
A depression is a long and deep recession but it doesn’t have an exact definition, like a recession does, so you might not realize it at the time but after it happens people say “That was actually a depression, not a simple recession.” During the depression people weren’t saying “We are going through the Great Depression.” They said, “Times are tough right now” and mostly just went on with life. If we have a depression, and I believe we will, conditions will still be better than during the Great Depression because we are beginning at a higher standard of living. In many ways it would be a good thing because it would encourage people to live within their means and get the economy back on a firm footing (assuming that the government doesn’t “help” too much). The way things are right now the only thing the government can to to avoid a depression is to try to blow another bigger bubble leading to a worse depression or else leading to true hyperinflation, which would be worse than a depression.
62
patient
// Jan 18, 2008 at 1:48 pm
My guess is that the KC median price will take a real bath in 2008, something like -25%. For Case-Shiller I guess -10%. The reason for the spread is that I think the market for +$700k homes is almost gone. I suspect those homes made up a significant part of the high side of the median the last couple of years.
63
Matthew
// Jan 18, 2008 at 1:53 pm
We will see a 5-10 percent correction in prices by this July, you won’t have to wait till the end of 2008.
64
NotaBull
// Jan 18, 2008 at 2:32 pm
“The reason for the spread is that I think the market for +$700k homes is almost gone.”
This is precisely the reason that I’m considering entering the high end of the market. As much as I’d rather get a 600K house for 500K, I’m considering getting the 700K house for 600K instead.
To me, it seems that I’m getting better value by doing this, and assuming that I sell in the distant future when jumbo/conventional spreads are more reasonable, then maybe I’ll make more profit?
I really go back and forth on this. Any ideas anyone?
(note that I’m talking about buying in about a year or more, depending on how things go)
65
patient
// Jan 18, 2008 at 2:51 pm
Notabull, personally I think that the main reason for the desirability of homes in the 700k range has been that it has been the entry point to a newer home in the more expensive areas. If that entry point falls that price range will struggle even more since they are now mainly competing with pure bulk which is more sensitive than location, so my bet is that you will generally do better ( from an investment point of view ) with the 500k home.
66
patient
// Jan 18, 2008 at 2:58 pm
Ups…when reading my own answer I realize that you might be right in the sweetspot if you pickup that former 700k home for 600k! So, yes I think you could be right.
67
deejayoh
// Jan 18, 2008 at 3:04 pm
I expect we’ll see 5-8% decline in the Case Shiller index by the end of the year - bringing it back to the 175-180 level. The KingCo SFH median may actually decline less. It’s a far “noisier” series than C/S and as of this month it’s tracking under the trend line for C/S - let’s say 5% bringing the median back to ~$410-415k
Inventory: +10-15%. Growth will slow as home prices fall, and more sellers give up/wait
Sales will be down probably low double digits.
I won’t be surprised to see home prices headed back up in April/May/June. The first half of the year could actually look ok.
68
patient
// Jan 18, 2008 at 3:07 pm
dj, is that -5% or +5%?
69
patient
// Jan 18, 2008 at 3:18 pm
The mix of range and absolute guesses is a bit unfair. I think I’ll change mine. +25% to -25%…
70
david losh
// Jan 18, 2008 at 3:30 pm
My wife and I sold our little menagerie of rental properties to buy the biggest house we could afford. It went against everything I personally believe in, but you only live once.
The appreciation is still strong even today. Larger houses are in demand.
As far as home pricing goes; 2005 was the top of the market. I think you can write off the past two years of double digit appreciation and still come out ahead.
71
alex
// Jan 18, 2008 at 3:34 pm
On Tim’s comment:
- “either got pretty darn lucky, or [nip] I had a better sense of where it was headed than the majority of those whose very livelihood is the market”
I would risk saying that in their heart of hearts, the specialitsts knew where the market was headed. They just couldn’t say it because their opinion had already been bought.
72
deejayoh
// Jan 18, 2008 at 3:59 pm
Median: -5%
C/S: - 5-8%
And I gave both the estimate of range and the correlating absolute number :).
73
patient
// Jan 18, 2008 at 4:13 pm
Thanks dj, the range comment was not aimed at anyone particular just a note that it’s hard to compare how good a prediciton is when you give a range compared to when you give and absolute number. For example if one person says that he predicts -15% and another says -3% - 10% and the fallout is -10%, who did the best prediction? Person number one is off 5% from he’s absolute number while person number two is off 7% from his lowest prediction even if his range predicition was spot on.
74
Alan
// Jan 18, 2008 at 4:32 pm
What is this +10% inventory prediction people are making? YOY? 10% from current?
I’m going to make the following inventory predictions:
Jan: 70% YoY
Feb: 55% YoY
Mar - Nov: 40% YoY
Dec: 70% YoY
75
sf_boomerang
// Jan 18, 2008 at 4:53 pm
Patient,
Well, we could go with the Price is Right model — the closest bid to the actual retail price without going over.
Except… wait… negative numbers… arrgh! Help me, Bob Barker!
76
patient
// Jan 18, 2008 at 5:13 pm
David Losh said,
“The appreciation is still strong even today. Larger houses are in demand.”
Uhm…let’s check that with an example. mls 27214789 is a nice home in a nice area. It’s been listed for a month without any takers at $789k. It was purchased in late Oct 2004 at $650k. C/s indicates appreciation of ~18% between Nov 04 and Nov 05 and ~13% between Nov 05 and Nov 06. This home would be valued at 650k * 1.18 = 767k in Nov 05 and 767k * 1.13 = 866k in Nov 06. So from Nov 06 until now we have a strong appreciation of the difference between 866k and 789k. Almost -10% appreciation in the last year if it sells at listing price. That’s stong alright. A strong indicator where prices are heading for these kind of homes and it’s not up.
77
Warren Bubble
// Jan 18, 2008 at 6:45 pm
Thought this article from the NYTimes was interesting:
Sorting Out the New Housing Market
…
The shape of the new American housing market — the post-bubble market — is starting to emerge. It is one that favors the young who never owned a house and the banks that have access to cheap deposits. It may be harshest on the two coasts, where both distress and a newfound lack of mobility may be on the increase.
The ideal home buyer now — in a reverse of what was true for years — is a renter who is not burdened with a house. Such a buyer will need a down payment from somewhere, and he or she will need enough income to meet the monthly payments for the foreseeable future, including any increase in adjustable rates that seems probable.
But not owning a home, which may be hard to sell, is a big plus.
…
http://www.nytimes.com/2008/01/18/business/18norris.html?_r=1&oref=slogin&pagewanted=print
78
david losh
// Jan 18, 2008 at 6:56 pm
Ah the McMansion; I knew some one would bring that up as soon as I made the comment. That house in Kirkland is a piece of poop. Number one it’s in Kirkland; in my opinion the most over priced, out of the way place a person could buy. Number two it was built according to International Building Codes, always suspect, yet to be proven a dismal failure in the Pacific North West.
I buy only buy in Seattle proper. No SoDo though I do like Renton for the proximity to Tacoma, Seattle and Bellevue.
I like late 1950s construction of big houses. I like timber, four by eights, and steel beams. I like concrete six to eight inches thick with expansion potential. I like funky fifties architecture that can be updated to be retro or modern.
79
Eleua
// Jan 18, 2008 at 8:13 pm
Chris,
If the banks came clean and marked down all their underperforming assets to market, it WOULD be a bankruptcy event.
Right now, they are at the “…and then a miracle happens…” part of their recovery plan.
80
Eleua
// Jan 18, 2008 at 8:23 pm
Guys,
Don’t listen to the RE schleppers. They are trying to unload inventory. Their lies caused this mess, and more of them won’t fix it.
They found functional morons to buy their wares when prices were unsustainably high. The only people dumber than the previous crop are those that are buying when the lie of “real estate always goes up” is an obvious falsehood.
Sit back and enjoy the show.
The phrase “real estate always goes up” has turned out to be the lie that killed our banking system. Remember this when the bank runs start and your stock market is sailing through the 6000s.
81
economist
// Jan 18, 2008 at 9:47 pm
Unlike asset prices such as oil or grain
Oil and grain are commodities, not assets. Sorry, you just don’t know what you’re talking about.
I repeat, commodity prices can and do up while asset prices (RE, stocks, bonds) go down.
yeah, i don’t know what the technical definition of hyperinflation is either, so i threw 10% out there as a high, but not unimaginable rate.
No need to imagine, we had it during the 70’s. I think a lot of posters on this board really don’t know much economic history beyond post-1980 US.
Hyperinflation is when prices go up every day. When the money you use takes up more space than what you buy with it. We’re talking about a 100%+ annual rate. Like 20’s Germany, 80’s Brazil or 90’s ex-USSR. Or Zimbabwe, right now.
82
Matthew
// Jan 18, 2008 at 10:32 pm
We’ll see a deflationary spiral much like Japan had in the 1990’s. In the short term we may have serious stagflation, bi-flation, or just plain inflation, but eventually it is going to lead to massive deflation.
Money is currently being destroyed, not created. I’d be surprised if we didn’t see a sharp rally in the dollar before the end of the year, and a serious decline in oil and gold.
83
b
// Jan 18, 2008 at 10:39 pm
economist,
So a single mistaken word makes my entire post invalid? Classic internet “I am wrong” response. Please explain to me in detail why you believe the current situation will not lead to deflation.
84
Lionel
// Jan 18, 2008 at 10:48 pm
Well, LA had about a 10% price drop YOY in a relatively good economy. Considering that we’re entering what appears to be one mother of a recession, I’m going to wager Seattle prices drop 15% or more this year.
85
Steve-o
// Jan 18, 2008 at 11:01 pm
I just read through all the posts in one sitting. Man, all this back and forth by the arm chair economists about money supply and falling dollar and bla bla bla puts me to sleep. To some degree, economics isn’t a science or even an art…it’s a religion. Some people believe one thing and some believe another and in the end….who gives a flying f*ck.
Regarding the argument about whether we are going to go through a “depression” versus a “recession”: They are the same "golly" thing. Economists called dowturns in the economy “depressions” right up until the “great” one. After the Great Depression, everybody agreed that we should start using a different word or people would get freaked out when they heard the word “depression”, so they started using the word “recession” instead. The recession of the 70s was as bad as the depression of the 30s. The reason it didn’t seem as bad was because there was govt assistance in the 70’s to ease the pain of the common man.
On a separate note: I think there is a general assumption by the average reader that the coming negative yoy % price curve will be shaped like the mirror image of the positive yoy % price curve of the last few years. That is to say, that the yoy% price numbers will go down slowly to about -10% and stay there for a couple of years and then generally trend up. This is backed up by looking at local housing markets that have recently tanked and then using the “Seattle is 14 months behind the other markets” reasoning. However, if a recession hits, it’s going to hit all the market at once and not wait 14 months to hit Seattle. So I predict that the negative yoy% numbers will drop quicker and go deeper then The Tim predicts - like -10% to -20% by end of 2008. Also, I believe that we will not see house prices rise in the spring of 2008 - at the best a flat line in the spring and then further dropping. I think 2009 will see a flattening of the yoy% curve or the beginnings of a long slow crawl upwards.
Tim: if I’m right, I think I should win that Pink Pony of yours, to do with as I please (demonic laugh and rubbing of hands).
86
economist
// Jan 18, 2008 at 11:05 pm
Please explain to me in detail why you believe the current situation will not lead to deflation.
Because the Fed is going to keep creating money out of nothing, which leads to a falling USD, which leads to rising prices. Like we are seeing for things like food and oil.
As I have previously pointed out, and is indeed happening right now, RE and stock prices can go down during a time of inflation. But consumables, i.e. the things which you actually have to buy, go up.
87
b
// Jan 18, 2008 at 11:11 pm
economist,
How exactly does the Fed create money out of nothing? If deflation is not on the way, why is the Fed bypassing the banking system and arguing for “helicopter drops” of tax checks sent out to everyone immediately? Do you believe that temporary price inflation in some areas means that there is not a large contraction in monetary supply occurring right now? The Fed is stuck because lowering rates now is pushing on a string, that is why they are going to extraordinary lengths to try and stop the deflation that is already occurring!
88
what goes up comes down
// Jan 18, 2008 at 11:26 pm
Steve-o: Great post.
89
Eleua
// Jan 19, 2008 at 12:39 am
The FED can’t stop the deflation.